FPI body hits out at Sebi circular

Beneficial ownership, as per the Sebi communique, would mean 25 per cent ownership in a company or 15 per cent in a trust or partnership — depending on how an FPI is structured abroad.

MUMBAI: In a rare display of defiance, a lobby of institutional investors and a top law firm advising it have openly attacked market regulator Sebi’s decision to curb investments by nonresident Indians (NRIs) and offshore vehicles of Indian companies — describing the new rules as “racial discrimination” that could spark a selloff in stocks.

According to an April directive of Sebi, NRIs, persons of Indian origin (PIOs) and overseas vehicles set up by Indian financial services groups cannot be ‘beneficial owners’ of foreign portfolio investors (FPIs).

“The circular is vague, opaque, and confusing. It distrusts NRIs and resident institutional community… A Nigerian can manage an FPI but not an NRI or a large Indian group,” said Nandita Agarwal Parker, president of Asset Managers Roundtable of India (AMRI), an association of FPIs, while jointly addressing the media here on Monday with Nishith Desai, founder of law firm Nishith Desai Associates. “We understand the government’s concern over round-tripping. FPIs have no objection in disclosing who the beneficial owners are. But why restrict investments?” said Desai at the press conference.

“Is it right to think that the entire NRI community is facilitating money laundering? Who markets the India story to foreign investors? It’s the NRIs and Indian institutions,” he said. Even fund managers with plain fiduciary capacity of running FPIs are also construed as ‘beneficial owners’ by Sebi. The regulatory hurdle (captured in Sebi’s definition of ownership) is higher if such FPIs are located in ‘high-risk’ countries – the definition of which is left unclear, raising questions whether Mauritius would be perceived as one such jurisdiction.

“An immediate impact of the circular (if not amended) is that from December 31, 2018, $75 billion investment managed by OCIs (overseas citizens of India), PIOs, NRIs and resident institutions (RIs) will be disqualified from investing into India and will have to be withdrawn and liquidated within a short time frame, thereby affecting the Indian markets and the Indian currency,” said an AMRI letter dated August 29 to Sebi Chairman Ajay Tyagi, copies of which were sent to the Prime Minister and finance minister.

AMRI members, on whose behalf the letter was signed, include AMANSA, Edelweiss, Karma Capital, Morgan Stanley, Enam, Helios, Kotak among others. Of the $450 billion investments by FPIs, $75 billion is estimated to be managed by NRIs, OCIs, PIOs and regulated resident institutions and individuals.

Beneficial ownership, as per the Sebi communique, would mean 25 per cent ownership in a company or 15 per cent in a trust or partnership — depending on how an FPI is structured abroad. The entry barrier is stiffer as the threshold is 10 per cent if an FPI is based in a high-risk jurisdiction. “Unfortunately, the circular was issued without any prior consultation with the stakeholders, who were not able to raise these concerns to the regulator before the circular became applicable,” AMRI said in its letter, adding that the circular, which was meant to enhance KYC norms, has placed a blanket ban on investments through certain FPIs.

“There is lack of communication between government departments. Don’t understand what the circular hopes to achieve,” said Parker.